Sarbanes-Oxley Act Goes to President's Desk

The landmark Sarbanes-Oxley Act of 2002 has cleared Congress and is awaiting the President’s signature. The Act establishes a comprehensive framework to modernize and reform the oversight of public company auditing, improves the quality and transparency of financial reporting, and strengthen the independence of auditors. The Act addresses systemic and structural weaknesses that in recent months have revealed a breakdown in corporate financial responsibility. The legislation will fundamentally change the way public companies do business and how the accounting profession performs its statutorily required audit function.

Among other things, the Act creates a public company accounting oversight board. The board is empowered to set auditing, quality control, and ethics standards, to inspect registered accounting firms, to conduct investigations, and to take disciplinary actions. As a check on the board's power, its decisions are subject to oversight and review by the SEC.

The Act strengthens auditor independence from corporate management by limiting the scope of consulting services that auditors can offer their public company audit clients. It also enhances the responsibility of public company directors and senior managers for the quality of the financial reporting and disclosure made by their companies.

In addition, the Act seeks to limit and expose to public view possible conflicts of interest affecting securities analysts.

The Act also creates a new federal felony for securities fraud, subject to a 25-year maximum penalty.

The law requires that transactions by insiders in their company’s stock must be reported by the second day following any transaction. This is a dramatic acceleration from current law, under which insiders have up to 40 days to report trades. The Act also prohibits insider trades during pension fund blackout periods. Thus, officers and directors cannot sell their shares while the majority of the company’s employees are required to hold theirs.

In addition, the measure requires that public companies must disclose all off-balance-sheet transactions and conflicts. Also, pro forma disclosures must be done in a way that is not misleading and be reconciled with a presentation based on generally accepted accounting principles.